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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended March 31, 2022

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from          to

Commission file number 001-35662

__________________

QUALYS, INC.

(Exact name of registrant as specified in its charter)

__________________

 

Delaware

 

77-0534145

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

919 E. Hillsdale Boulevard, 4th Floor, Foster City, California 94404

(Address of principal executive offices, including zip code)

 

(650) 801-6100

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

QLYS

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

The number of shares of the registrant's common stock outstanding as of April 28, 2022 was 38,834,053.

 

 

 

 

 
 

Qualys, Inc.

 

TABLE OF CONTENTS

 

   

Page

Risk Factor Summary 3

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 
 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Condensed Consolidated Statements of Stockholders' Equity

8

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults upon Senior Securities

50

Item 4.

Mine Safety Disclosures

50

Item 5.

Other Information

50

Item 6.

Exhibits

50

 

Signatures

51

 

 

 

RISK FACTOR SUMMARY

 

Our business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this Quarterly Report on Form 10-Q. If any of the following risks actually occur (or if any of those listed elsewhere in this Quarterly Report on Form 10-Q occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.

 

The continued spread of Coronavirus Disease 2019 ("COVID-19"), or any similar widespread infectious disease outbreak, could harm our business, financial condition and results of operations.

 

Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.

 

If we do not successfully anticipate market needs and opportunities or are unable to enhance our solutions and develop new solutions that meet those needs and opportunities on a timely or cost-effective basis, we may not be able to compete effectively and our business and financial condition may be harmed.

 

If we fail to continue to effectively scale and adapt our platform to meet the performance and other requirements of our customers, our operating results and our business would be harmed.

 

If we are unable to renew existing subscriptions for our IT, security and compliance solutions, sell additional subscriptions for our solutions and attract new customers, our operating results would be harmed. 

 

If the market for cloud solutions for IT, security and compliance does not evolve as we anticipate, our revenues may not grow and our operating results would be harmed.

 

Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future.

 

Our platform, website and internal systems may be subject to intentional disruption or other security incidents that could result in liability and adversely impact our reputation and future sales.

 

Our sales cycle can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, revenues may vary from period to period, which may cause our operating results to fluctuate and could harm our business.

 

Adverse economic conditions or reduced IT spending may adversely impact our business.

 

Our IT, security and compliance solutions are delivered from 11 shared cloud platforms, and any disruption of service at these facilities would interrupt or delay our ability to deliver our solutions to our customers which could reduce our revenues and harm our operating results.

 

We face competition in our markets, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

 

If our solutions fail to detect vulnerabilities or incorrectly detect vulnerabilities, our brand and reputation could be harmed, which could have an adverse effect on our business and results of operations.

 

If we are unable to continue the expansion of our sales force, sales of our solutions and the growth of our business would be harmed.

 

We rely on third-party channel partners to generate a substantial amount of our revenues, and if we fail to expand and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

 

A significant portion of our customers, channel partners and employees are located outside of the United States, which subjects us to a number of risks associated with conducting international operations, and if we are unable to successfully manage these risks, our business and operating results could be harmed.

 

Our business and operations have experienced significant growth, and if we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results may be negatively affected.

 

A portion of our revenues are generated by sales to government entities, which are subject to a number of challenges and risks.

 

Undetected software errors or flaws in our solutions could harm our reputation, decrease market acceptance of our solutions or result in liability.

 

Our solutions could be used to collect and store personal information of our customers’ employees or customers, and therefore privacy and other data handling concerns could result in additional cost and liability to us or inhibit sales of our solutions.

 

Our solutions contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solutions.

 

We use third-party software and data that may be difficult to replace or cause errors or failures of our solutions that could lead to lost customers or harm to our reputation and our operating results.

 

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

 

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and harm our business and operating results.

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Qualys, Inc. 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share data)

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $166,287  $137,328 

Short-term marketable securities

  290,851   267,960 

Accounts receivable, net of allowance of $880 and $793 as of March 31, 2022 and December 31, 2021, respectively

  89,294   108,998 

Prepaid expenses and other current assets

  26,752   32,112 

Total current assets

  573,184   546,398 

Long-term marketable securities

  82,360   111,198 

Property and equipment, net

  63,377   61,854 

Operating leases - right of use asset

  34,569   37,016 

Deferred tax assets, net

  29,986   25,087 

Intangible assets, net

  4,839   6,545 

Goodwill

  7,447   7,447 

Restricted cash

  1,200   1,200 

Other noncurrent assets

  17,588   17,814 

Total assets

 $814,550  $814,559 

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Accounts payable

 $2,477  $1,296 

Accrued liabilities

  37,083   32,504 

Deferred revenues, current

  266,934   257,872 

Operating lease liabilities, current

  12,044   12,608 

Total current liabilities

  318,538   304,280 

Deferred revenues, noncurrent

  31,117   32,753 

Operating lease liabilities, noncurrent

  33,284   35,914 

Other noncurrent liabilities

  4,976   4,898 

Total liabilities

  387,915   377,845 

Commitments and contingencies (Note 8)

          

Stockholders’ equity:

        

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding at March 31, 2022 and December 31, 2021

      

Common stock, $0.001 par value; 1,000,000 shares authorized; 38,875 and 39,112 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

  39   39 

Additional paid-in capital

  485,676   477,323 

Accumulated other comprehensive income (loss)

  (670)  1,007 

Accumulated deficit

  (58,410)  (41,655)

Total stockholders’ equity

  426,635   436,714 

Total liabilities and stockholders’ equity

 $814,550  $814,559 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 

Revenues

  $ 113,420     $ 96,756  

Cost of revenues

    24,002       21,680  

Gross profit

    89,418       75,076  

Operating expenses:

               

Research and development

    23,107       17,749  

Sales and marketing

    20,142       17,989  

General and administrative

    12,634       42,043  

Total operating expenses

    55,883       77,781  

Income (loss) from operations

    33,535       (2,705 )

Other income (expense), net:

               

Interest expense

          (4 )

Interest income

    518       746  

Other income (expense), net

    (710 )     (244 )

Total other income (expense), net

    (192 )     498  

Income (loss) before income taxes

    33,343       (2,207 )

Income tax provision (benefit)

    7,933       (2,435 )

Net income

  $ 25,410     $ 228  

Net income per share:

               

Basic

  $ 0.65     $ 0.01  

Diluted

  $ 0.64     $ 0.01  

Weighted average shares used in computing net income per share:

               

Basic

    38,992       39,209  

Diluted

    40,001       40,430  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 

Net income

  $ 25,410     $ 228  

Other comprehensive income (loss), net of tax

               

Net change in unrealized losses on available-for-sale debt securities, net of tax

    (2,128 )     (389 )

Net change in unrealized gains on cash flow hedges, net of tax

    451       993  

Other comprehensive income (loss), net of tax

    (1,677 )     604  

Comprehensive income

  $ 23,733     $ 832  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 

Cash flow from operating activities:

               

Net income

  $ 25,410     $ 228  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization expense

    8,982       9,078  

Bad debt expense

    141       138  

Loss on disposal of property and equipment

    5        

Stock-based compensation

    11,745       38,202  

Amortization of premiums on marketable securities

    762       967  

Deferred income taxes

    (5,095 )     (5,162 )

Changes in operating assets and liabilities:

               

Accounts receivable

    19,563       14,819  

Prepaid expenses and other assets

    6,067       (6,083 )

Accounts payable

    599       107  

Accrued liabilities

    3,435       1,686  

Deferred revenues

    7,426       3,874  

Net cash provided by operating activities

    79,040       57,854  

Cash flow from investing activities:

               

Purchases of marketable securities

    (81,800 )     (115,610 )

Sales and maturities of marketable securities

    84,915       145,044  

Purchases of property and equipment

    (7,639 )     (6,259 )

Net cash provided by (used in) investing activities

    (4,524 )     23,175  

Cash flow from financing activities:

               

Repurchases of common stock

    (46,581 )     (31,029 )

Proceeds from exercise of stock options

    2,569       2,264  

Payments for taxes related to net share settlement of equity awards

    (3,631 )     (17,643 )

Proceeds from issuance of common stock through employee stock purchase plan

    2,086        

Net cash used in financing activities

    (45,557 )     (46,408 )

Net increase in cash, cash equivalents and restricted cash

    28,959       34,621  

Cash, cash equivalents and restricted cash at beginning of period

    138,528       75,332  

Cash, cash equivalents and restricted cash at end of period

  $ 167,487     $ 109,953  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

 

 

Qualys, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(unaudited)

(in thousands)

 

                           

Accumulated

      Retained          
   

Common Stock

   

Additional

   

Other

      Earnings    

Total

 
                   

Paid-In

   

Comprehensive

   

(Accumulated

   

Stockholders

 
   

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit)

   

Equity

 

Balances at December 31, 2021

    39,112     $ 39     $ 477,323     $ 1,007     $ (41,655 )   $ 436,714  

Net income

                            25,410       25,410  

Other comprehensive loss, net of tax

                      (1,677 )           (1,677 )

Issuance of common stock upon exercise of stock options

    66             2,569                   2,569  

Repurchase of common stock

    (368 )           (4,416 )           (42,165 )     (46,581 )

Issuance of common stock upon vesting of restricted stock units

    70                                

Taxes related to net share settlement of equity awards

    (28 )           (3,631 )                 (3,631 )

Issuance of common stock through employee stock purchase plan

    23             2,086                   2,086  

Stock-based compensation

                11,745                   11,745  

Balances at March 31, 2022

    38,875     $ 39     $ 485,676     $ (670 )   $ (58,410 )   $ 426,635  

 

 

                           

Accumulated

   

Retained

         
   

Common Stock

   

Additional

   

Other

   

Earnings

   

Total

 
                   

Paid-In

   

Comprehensive

   

(Accumulated

   

Stockholders

 
   

Shares

   

Amount

   

Capital

   

Income (Loss)

   

Deficit)

   

Equity

 

Balances at December 31, 2020

    39,253     $ 39     $ 401,359     $ (484 )   $ 3,568     $ 404,482  

Net income

                            228       228  

Other comprehensive income, net of tax

                      604             604  

Issuance of common stock upon exercise of stock options

    69             2,264                   2,264  

Repurchase of common stock

    (269 )           (3,232 )           (27,797 )     (31,029 )

Issuance of common stock upon vesting of restricted stock units

    305                                

Taxes related to net share settlement of equity awards

    (155 )           (17,643 )                 (17,643 )

Stock-based compensation

                38,202                   38,202  

Balances at March 31, 2021

    39,203     $ 39     $ 420,950     $ 120     $ (24,001 )   $ 397,108  

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

 

 

 

Qualys, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

NOTE 1.

Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Qualys, Inc. (the “Company”, "we", "us", "our") was incorporated in the state of Delaware on December 30, 1999. The Company is headquartered in Foster City, California and has wholly-owned subsidiaries throughout the world. The Company is a pioneer and leading provider of cloud-based information technology ("IT"), security and compliance solutions that enable organizations to identify security risks to their IT infrastructures, help protect their IT systems and applications from ever-evolving cyber-attacks and achieve compliance with internal policies and external regulations. The Company’s cloud solutions address the growing security and compliance complexities and risks that are amplified by the dissolving boundaries between internal and external IT infrastructures and web environments, the rapid adoption of cloud computing and the proliferation of geographically dispersed IT assets. Organizations can use the Company’s integrated suite of solutions delivered on its Qualys Cloud Platform to cost-effectively obtain a unified view of their security and compliance posture across globally-distributed IT infrastructures.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information as well as the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited financial statements as of that date but does not include all disclosures, including notes required by U.S. GAAP. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations expected for the entire year ending December 31, 2022 or for any other future annual or interim periods. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 22, 2022. 

 

Risks and Uncertainties

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. As a result of COVID-19, the Company temporarily modified certain aspects of its business, including restricting employee travel, requiring employees to work from home, and canceling certain events and meetings, among other modifications. While the Company has resumed in-office work, employee travel, and in-person events and meetings, the Company will continue to actively monitor the situation and may take actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of its employees, customers, partners, suppliers and stockholders. While the Company has not incurred significant disruptions from the COVID-19 pandemic to date and does not expect the pandemic will have a significant impact on the Company's business in 2022, the Company is unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, actions that may be taken by governmental authorities and the impact to the business of the Company's customers and partners. The Company will continue to evaluate the nature and extent of the impact to its business, financial position, results of operations and cash flows.

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of the condensed consolidated financial statements and the reported results of operations during the reporting period. The Company’s management regularly assesses these estimates, which primarily affect revenue recognition, allowance for credit loss, the valuation of goodwill and intangible assets, leases, stock-based compensation and income tax provision. Actual results could differ from those estimates and such differences may be material to the accompanying unaudited condensed consolidated financial statements.

 

9

 

Non-Marketable Securities

 

During the fiscal year ended December 31, 2018, the Company invested $2.5 million in preferred stock of a privately-held company. The fair value of the investment is not readily available, and there are no quoted market prices for the investment. The Company accounts for the investment at cost less impairment and will measure the investment at fair value when the Company identifies observable price changes. The investment is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment has been incurred related to the investment. The investment is included in other noncurrent assets on the condensed consolidated balance sheets. The Company has not received any dividends from the investment.

 

Recently Adopted Accounting Pronouncements

 

None. 

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

The Company does not believe any new accounting pronouncements issued by the FASB that have not become effective will have a material impact on its condensed consolidated financial statements.

 

There have been no material changes to the Company’s significant accounting policies set forth in "Note 1" of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

10

 
 

NOTE 2.

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For certain of the Company’s financial instruments, including certain cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.

 

         The Company measures and reports certain cash equivalents, marketable securities, derivative foreign currency forward contracts at fair value in accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities.

 

Level 2-Valuations based on other than quoted prices in active markets for identical assets and liabilities, including quoted prices for identical assets or liabilities in less active or inactive markets, quoted prices for similar assets or liabilities in active markets, or inputs other than quoted prices that are observable for substantially the full term of the assets or liabilities.

 

Level 3-Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

The Company's financial instruments consist of assets and liabilities measured using Level 1 and 2 inputs. Level 1 assets include a highly liquid money market fund, which is valued using unadjusted quoted prices that are available in an active market for an identical asset. Level 2 assets include fixed-income U.S. Treasury and government agency securities, commercial paper, corporate bonds, asset-backed securities, foreign government securities and derivative financial instruments consisting of foreign currency forward contracts. The securities, bonds and commercial paper are valued using prices from independent pricing services based on quoted prices of identical instruments in less active or inactive markets, quoted prices of similar instruments in active markets, or industry models using data inputs such as interest rates and prices that can be directly observed or corroborated in active markets. The foreign currency forward contracts are valued using observable inputs, such as quotations on forward foreign exchange points and foreign interest rates.

 

The Company's cash and cash equivalents, and marketable securities consist of the following:

 

   

March 31, 2022

 
           

Unrealized

   

Unrealized

         
   

Amortized Cost

   

Gains

   

Losses

   

Fair Value

 
   

(in thousands)

 

Cash and cash equivalents:

                               

Cash

  $ 89,526     $     $     $ 89,526  

Money market funds

    67,811                   67,811  

Commercial paper

    8,951             (1 )     8,950  

Total

    166,288             (1 )     166,287  

Short-term marketable securities:

                               

Commercial paper

    14,619             (28 )     14,591  

Corporate bonds

    43,756       19       (179 )     43,596  

Asset-backed securities

    3,708             (1 )     3,707  

U.S. Treasury and government agencies

    229,076             (1,121 )     227,955  

Foreign government

    1,002                   1,002  

Total

    292,161       19       (1,329 )     290,851  

Long-term marketable securities:

                               

Corporate bonds

    43,266       10       (765 )     42,511  

Asset-backed securities

    18,482       2       (92 )     18,392  

U.S. Treasury and government agencies

    21,613             (156 )     21,457  

Total

    83,361       12       (1,013 )     82,360  

Total

  $ 541,810     $ 31     $ (2,343 )   $ 539,498  

 

11

 
   

December 31, 2021

 
           

Unrealized

   

Unrealized

         
   

Amortized Cost

   

Gains

   

Losses

   

Fair Value

 
   

(in thousands)

 

Cash and cash equivalents:

                               

Cash

  $ 61,220     $     $     $ 61,220  

Money market funds

    75,258                   75,258  

Commercial paper

    850                   850  

Total

    137,328                   137,328  

Short-term marketable securities:(1)

                               

Commercial paper

    18,046                   18,046  

Corporate bonds

    28,869       101       (7 )     28,963  

Asset-backed securities

    3,952                   3,952  

U.S. Treasury and government agencies

    217,160       2       (163 )     216,999  

Total

    268,027       103       (170 )     267,960  

Long-term marketable securities:

                               

Corporate bonds

    57,762       160       (182 )     57,740  

Asset-backed securities

    14,941       6       (36 )     14,911  

U.S. Treasury and government agencies

    37,664             (136 )     37,528  

Foreign government

    1,007       12             1,019  

Total

    111,374       178       (354 )     111,198  

Total

  $ 516,729     $ 281     $ (524 )   $ 516,486  

 

(1) Revised for correction of classification of amounts and security types disclosed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

As of March 31, 2022 the total unrealized loss from marketable securities that had been in a continuous unrealized loss position for 12 months or longer was not material. The Company had the ability and intent to hold all marketable securities that were in an unrealized loss position until recovery of the amortized cost basis. The Company considered the extent to which fair value was less than amortized cost basis and conditions related to security’s industry and geography and changes to the ratings, if any, and concluded the decline in fair value compared to carrying value was not related to credit loss. As of December 31, 2021, there were no marketable securities that had been in a continuous unrealized loss position for 12 months or longer.

 

The following table sets forth by level within the fair value hierarchy the fair value of the Company's cash equivalents and marketable securities measured on a recurring basis:

 

   

March 31, 2022

 
   

Level 1

   

Level 2

   

Fair Value

 
   

(in thousands)

 

Money market funds

  $ 67,811     $     $ 67,811  

Commercial paper

          23,541       23,541  

Corporate bonds

          86,107       86,107  

Asset-backed securities

          22,099       22,099  

U.S. Treasury and government agencies

          249,412       249,412  

Foreign government

          1,002       1,002  

Total

  $ 67,811     $ 382,161     $ 449,972  

 

   

December 31, 2021

 
   

Level 1

   

Level 2

   

Fair Value

 
   

(in thousands)

 

Money market funds

  $ 75,258     $     $ 75,258  

Commercial paper

          18,896       18,896  

Corporate bonds

          86,703       86,703  

Asset-backed securities

          18,863       18,863  

U.S. Treasury and government agencies

          254,527       254,527  

Foreign government

          1,019       1,019  

Total

  $ 75,258     $ 380,008     $ 455,266  

 

12

 

The following summarizes the fair value of marketable securities by contractual maturity:

 

   

March 31, 2022

 
   

Mature within

   

Mature after One Year

   

Mature over

         
   

One Year

   

through Two Years

   

Two Years

   

Fair Value

 
   

(in thousands)

 

Commercial paper

  $ 23,541     $     $     $ 23,541  

Corporate bonds

    43,595       28,355       14,157       86,107  

Asset-backed securities

    3,708       6,584       11,807       22,099  

U.S. Treasury and government agencies

    227,955       15,980       5,477       249,412  

Foreign government

    1,002                   1,002  

Total

  $ 299,801     $ 50,919     $ 31,441     $ 382,161  

 

 

Derivative Financial Instruments

 

Designated cash flow hedges

 

The Company enters into foreign currency forward contracts to reduce the risk of variability in future cash flow due to foreign currency exchange rate fluctuations from certain forecasted subscription revenue orders billed in British Pound ("GBP") and Euro and operating expenses incurred in Indian Rupee ("INR"), which are designated as cash flow hedges. Unrealized foreign exchange gains or losses related to those designated cash flow hedge contracts are recorded in Accumulated other comprehensive income ("AOCI") and will be reclassified into revenues or operating expenses, respectively, in the same periods when the hedged transactions are recognized in earnings.

 

As of  March 31, 2022, the Company had designated cash flow hedge forward contracts with notional amounts of €28.8 million, £9.4 million and Rs.3,116.4 million. As of  December 31, 2021, the Company had designated cash flow hedge forward contracts with notional amounts of €29.8 million, £9.4 million and Rs.2,955.3 million. As of March 31, 2022, a net amount of unrealized gain of $1.7 million before tax on the foreign currency forward contracts for GBP and Euro reported in AOCI is expected to be reclassified into revenue within the next 12 months. As of March 31, 2022, the net amount of unrealized loss on the foreign currency forward contracts for INR reported in AOCI was not material. 

 

Non-designated forward contracts

 

The Company also uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities, which are not designated as cash flow hedges.

 

As of  March 31, 2022, the Company had non-designated forward contracts with notional amounts o€38.2 million, £18.4 million, Rs.147.6 million, Canadian Dollar ("C$") 3.6 million and Swiss Franc ("CHF") 1.0 million. As of  December 31, 2021, the Company had non-designated forward contracts with notional amounts of €34.5 million, £11.6 million, Rs.74.9 million, C$2.5 million and CHF1.0 million.

 

13

 

The following summarizes derivative financial instruments as of March 31, 2022 and December 31, 2021:

 

   

March 31,

   

December 31,

 
   

2022

   

2021

 

Assets

 

(in thousands)

 

Foreign currency forward contracts designated as cash flow hedge

  $ 1,652     $ 1,737  

Foreign currency forward contracts not designated as hedging instruments

    1,394       1,599  

Total

  $ 3,046     $ 3,336  

Liabilities

               

Foreign currency forward contracts designated as cash flow hedge

  $ (201 )   $ (181 )

Foreign currency forward contracts not designated as hedging instruments

    (294 )     (207 )

Total

  $ (495 )   $ (388 )

 

All foreign currency forward contracts were valued at fair value using Level 2 inputs.

 

The following summarizes the gains (losses) recognized from forward contracts and other foreign currency transactions in other income (expense), net on the condensed consolidated statements of operations:

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 
    (in thousands)  

Net gains from non-designated forward contracts

  $ 1,155     $ 1,085  

Other foreign currency transaction losses

    (1,818 )     (1,258 )

Total foreign exchange losses, net

    (663 )     (173 )

Other income (expense)

    (47 )     (71 )

Other income (expense), net

  $ (710 )   $ (244 )

 

 

14

 
 

NOTE 3.

Accumulated Other Comprehensive Income (Loss)

 

The components and changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows:

 

    Available-for-sale debt securities    

Cash flow hedges

   

Total

 
    (in thousands)  

Balances at December 31, 2021

  $ (185 )   $ 1,192     $ 1,007  

Change in unrealized gains (losses) during the period

    (2,070 )     648       (1,422 )

Net gains reclassified into income during the period

    -       (60 )     (60 )

Income tax provision

    (58 )     (137 )     (195 )

Net change during the period

    (2,128 )     451       (1,677 )

Balances at March 31, 2022

    (2,313 )     1,643       (670 )
                         

Balances at December 31, 2020

  $ 1,224     $ (1,708 )   $ (484 )

Change in unrealized gains (losses) during the period

    (501 )     1,092       591  

Net losses reclassified into income during the period

    8       192       200  

Income tax benefit (provision)

    104       (291 )     (187 )

Net change during the period

    (389 )     993       604  

Balances at March 31, 2021

    835       (715 )     120  

 

The effects on income before income taxes of amounts reclassified from AOCI to the condensed consolidated statements of operations were as follows:

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 
   

(in thousands)

Reclassification of AOCI - Available-for-sale debt securities

               

Other income (expense), net

  $     $ (8 )
                 

Reclassification of AOCI - Cash flow hedges

               

Revenues

  $ (46 )   $ (217 )

Cost of revenues

    23       5  

Research and development expenses

    68       17  

Sales and marketing expenses

    4       1  

General and administrative expenses

    11       2  

Total

  $ 60     $ (192 )

 

15

 
 

NOTE 4.

Property and Equipment, Net

 

Property and equipment, net, consists of the following:

 

   

March 31,

   

December 31,

 
   

2022

   

2021

 
   

(in thousands)

 

Computer equipment

  $ 169,746     $ 161,809  

Computer software

    25,805       25,807  

Leasehold improvements

    21,000       21,092  

Scanner appliances

    16,939       16,510  

Furniture, fixtures and equipment

    6,429       6,479  

Total property and equipment

    239,919       231,697  

Less: accumulated depreciation and amortization

    (176,542 )     (169,843 )

Property and equipment, net

  $ 63,377     $ 61,854  

 

As of  March 31, 2022 and December 31, 2021, physical scanner appliances and other computer equipment that are or will be subject to leases by customers had a net carrying value of $7.0 million and $5.3 million, respectively, including assets that had not been placed in service of $3.5 million and $1.3 million, respectively. Depreciation and amortization expenses relating to property and equipment were $7.1 million and $7.3 million for the three months ended March 31, 2022 and 2021, respectively.

 

 

16

 
 

NOTE 5.

Revenue from Contracts with Customers

 

The Company records deferred revenue when cash payments are received or due in advance of its performance obligations offset by revenue recognized in the period. Revenues of $100.0 million and $83.5 million were recognized during the three months ended March 31, 2022 and 2021, respectively, which amounts were included in the deferred revenue balances as of December 31, 2021 and 2020, respectively. 

 

The Company's payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. In certain circumstances, based on the credit quality of the customer, the Company requires payment before the products or services are delivered to the customer.

 

The following table sets forth the expected revenue from all remaining performance obligations as of March 31, 2022:

 

  

(in thousands)

 

2022 (remaining nine months)

 $116,288 

2023

  114,911 

2024

  45,138 

2025

  3,980 

2026

  669 

2027 and thereafter

  167 

Total

 $281,153 

 

Revenues allocated to remaining performance obligations represents the transaction price of noncancelable orders for which service has not been performed, which include deferred revenue and the amounts that will be invoiced and recognized as revenues in future periods from open contracts and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

 

From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. The Company concluded that these contracts did not contain a financing component.

 

Revenues by sales channel are as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Direct

 $66,452  $57,952 

Partner

  46,968   38,804 

Total

 $113,420  $96,756 

 

The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 12, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area.

 

17

 

Deferred costs to obtain contracts are as follows:

 

  

March 31, 2022

  

December 31, 2021

 
  

(in thousands)

 

Current

 $4,321  $4,223 

Noncurrent

 $8,511  $8,391 

 

For the three months ended March 31, 2022 and 2021, the Company recognized $1.2 million and $0.9 million, respectively, of amortization expense relating to deferred costs to obtain contracts in sales and marketing expense in the condensed consolidated statements of operations. During the same periods, there was no impairment loss related to the deferred costs to obtain contracts.

 

 

18

 
 

NOTE 6.

Intangible Assets, Net

 

Intangible assets consist primarily of developed technology and patent licenses acquired from business or asset acquisitions. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets.

 

The carrying values of intangible assets are as follows:

 

                   

March 31, 2022

 
   

Weighted Average

   

Weighted Average

                         
   

Life

   

Remaining Life

           

Accumulated

       

(in thousands)

 

(Years)

   

(Years)

   

Cost

   

Amortization

   

Net Book Value

 

Developed technology

    4.5       0.7     $ 28,556     $ (24,081 )   $ 4,475  

Patent licenses

    14.0       2.4       1,387       (1,146 )     241  

Non-compete agreements

    2.0       0.3       500       (417 )     83  

Total intangibles subject to amortization

                  $ 30,443     $ (25,644 )     4,799  

Intangible assets not subject to amortization

                                    40  

Total intangible assets, net

                                  $ 4,839  

 

                   

December 31, 2021

 
   

Weighted Average

   

Weighted Average

                         
   

Life

   

Remaining Life

           

Accumulated

       

(in thousands)

 

(Years)

   

(Years)

   

Cost

   

Amortization

   

Net Book Value

 

Developed technology

    4.5       0.9     $ 28,556     $ (22,463 )   $ 6,093  

Patent licenses

    14.0       2.7       1,387       (1,121 )     266  

Non-compete agreements

    2.0       0.6       500       (354 )     146  

Total intangibles subject to amortization

                  $ 30,443     $ (23,938 )     6,505  

Intangible assets not subject to amortization

                                    40  

Total intangible assets, net

                                  $ 6,545  

 

Intangible asset amortization expense was $1.7 million and $1.6 million for the three months ended March 31, 2022 and 2021, respectively. Intangible asset amortization expenses were primarily recorded in cost of revenues in the condensed consolidated statements of operations.

 

As of March 31, 2022, the Company expects amortization expense in future periods to be as follows:

 

   

(in thousands)

 

2022 (remaining nine months)

  $ 3,357  

2023

    590  

2024

    452  

2025

    240  

2026

    160  

Total expected future amortization expense

  $ 4,799  

 

 

19

 
 

NOTE 7.

Leases

 

The Company leases certain offices, computer equipment and its data center facilities under non-cancelable operating leases for varying periods through 2028. While under the Company's lease agreements the Company has options to extend its certain leases, the Company has not included renewal options in determining the lease terms for calculating its lease liabilities, as these options are not reasonably certain of being exercised. Lease expense was $3.6 million for each of the three months ended March 31, 2022 and 2021.

 

Supplemental cash flow information related to operating leases was as follows:

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Cash payments included in the measurement of lease liabilities

 $4,035  $3,308 

Lease liabilities arising from obtaining right-of-use assets

 $638  $39 

 

The weighted average remaining lease term and the weighted average discount rate of the Company's operating leases were as follows:

 

  

March 31, 2022

  

December 31, 2021

 

Weighted average remaining lease term (years)

  3.2   3.3 

Weighted average discount rate

  4.8%  4.8%

 

20

 
 

NOTE 8.

Commitments and Contingencies

 

Purchase Obligation

 

The Company has entered into agreements to purchase goods and services in the ordinary course of business. As of  March 31, 2022, the remaining purchase commitments for future periods are as follows:
 
   

(in thousands)

 

2022 (remaining nine months)

  $ 14,671  

2023

    14,455  

2024

    10,943  

2025

    11,762  

2026

    11,762  

2027 and thereafter

    14,000  

Total

  $ 77,593  

 

Indemnifications

 

The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company's bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors and certain officers for liabilities arising out of their relationship, and (iii) contracts under which the Company may be required to indemnify customers or resellers from certain liabilities arising from potential infringement of intellectual property rights, as well as potential damages caused by limited product defects. To date, the Company has not incurred and has not recorded any liability in connection with such indemnifications.

 

The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors.

 

21

 
 

NOTE 9.

Stockholders' Equity and Stock-based Compensation

 

Equity Incentive Plans

 

2000 Equity Incentive Plan

 

Under the 2000 Equity Incentive Plan (the "2000 Plan"), the Company was authorized to grant to eligible participants either incentive stock options ("ISOs") or non-statutory stock options (“NSOs”). The 2000 Plan was terminated in connection with the closing of the Company's initial public offering, and accordingly, no shares are currently available for grant under the 2000 Plan. The 2000 Plan continues to govern outstanding awards granted thereunder.

 

2012 Equity Incentive Plan

 

Under the 2012 Equity Incentive Plan (the "2012 Plan"), the Company is authorized to grant to eligible participants ISOs, NSOs, stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance units and performance shares. During the three months ended March 31, 2022, 1,956 thousand shares were added to the 2012 Plan pursuant to an automatic annual increase provision in the plan. As of March 31, 2022, 9,981 thousand shares were available for grant under the 2012 Plan.

 

2021 Employee Stock Purchase Plan

 

On June 9, 2021, the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “ESPP”). A total of 600 thousand shares were authorized for issuance to eligible participating employees upon adoption of the ESPP. The ESPP provides for consecutive 6-month offering periods beginning on or about August 16 and February 16 of each year. Eligible employees who elect to participate can contribute from 1% to 15% of their eligible compensation through payroll withholding. During any offering period, contribution rates cannot be changed. However, eligible employees  may withdraw from the current offering period. Any contributions made prior to each purchase date in the case of withdrawal or termination of employment will be refunded. On each purchase date, eligible participating employees will purchase the shares at a price per share equal to 85% of the lesser of (i) the fair market value of the Company's stock on the first trading day of the offering period or (ii) the fair market value of the Company's stock on the purchase date (i.e., the last trading day of the offering period).

 

During the three months ended March 31, 2022, 22.5 thousand shares were issued in connection with the purchase of common stock by participating employees. As of March 31, 2022, 577.5 thousand shares were available for future purchases.

 

Stock-based Compensation

 

The following table shows a summary of the stock-based compensation expense included in the condensed consolidated statements of operations:

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 
   

(in thousands)

Cost of revenues

  $ 1,080     $ 875  

Research and development

    3,287       2,215  

Sales and marketing

    2,031       1,628  

General and administrative

    5,347       33,484  

Total stock-based compensation

  $ 11,745     $ 38,202  

 

As of March 31, 2022, the Company had unrecognized stock-based compensation expenses of $17.7 million, $67.2 million, $4.2 million, and $0.7 million related to options, RSUs, performance-based RSUs, and ESPP purchase rights, respectively, which are expected to be recognized over weighted-average periods of 2.8 years, 2.7 years, 1.9 years, and 0.4 years, respectively.

 

22

 

Performance-based Restricted Stock Units ("PSUs") and Performance-based Stock Options

 

        On October 28, 2021, the compensation committee of the Company's board of directors (Compensation Committee) granted to certain executive officers of the Company equity awards consisting of RSUs and an aggregate number of 73 thousand PSUs, which represents the target number of PSUs allocated to awards that are divided into three equal tranches, with each tranche covering one-year performance period for the calendar years 2022, 2023, and 2024, respectively. The actual number of PSUs eligible to vest each year range from 0% to 200% of the annual target number, depending on the level of achievement of performance metrics related to revenue growth and adjusted EBITDA margin corresponding to that year, which are established by the Compensation Committee before the commencement of each year. The vesting and release of the first and second tranche is capped at 100% of the target number at the end of the first and second year, respectively, with cumulative achievement over 100%, if any, to be vested and released at the end of the third year, together with the vesting of the third tranche. If any of the executive officers is terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, any unvested PSUs eligible to vest pursuant to cumulative achievements over 100% for past tranches along with any target number of unvested PSUs for any remaining tranches will vest immediately. Since the performance metrics for the second and third tranches of these PSUs have not been established as of March 31, 2022, the grant date has not been determined and no expenses have been recognized for the respective tranches.

 

On April 27, 2021, the Compensation Committee granted to the Company’s President and Chief Executive Officer an equity award consisting of RSUs and a target number of 9,671 PSUs. The PSUs are scheduled to vest at the end of the three-year performance period from January 2021 through December 2023. The actual number of PSUs eligible to vest range from 0% to 200% of the target number, depending on the level of achievement of performance metrics related to revenue growth and free cash flow per share growth during the performance period. If the Company's President and Chief Executive Officer is terminated (a) by reason of death or disability or (b) by the Company for reasons other than cause or good reason within 12 months following a change in control, then 100% of any unvested portions of the award will vest, with any vesting in connection with terminations due to change in control conditioned upon the effectiveness of a release of claims in favor of the Company.

 

  The Company recognized $0.8 million of stock-based compensation expenses related to all PSUs during the three months ended March 31, 2022.

 

On  March 19, 2021, the Company’s former chief executive officer, Philippe Courtot ("Mr. Courtot"), resigned from the Company due to health issues. The Compensation Committee determined that Mr. Courtot’s termination of employment was on account of disability. In accordance with the equity award agreements of Mr. Courtot's then outstanding awards, all eligible outstanding RSUs, PSUs and performance-based stock options held by Mr. Courtot became immediately vested as of the date of his termination of employment. As a result, the Company recognized $27.3 million of stock-based compensation expense due to the accelerated vesting in the condensed consolidated statements of operations during the three months ended March 31, 2021.

 

 

Stock Option Activity

 

A summary of the Company’s stock option activity is as follows:

 

           

Weighted

   

Weighted Average

         
   

Outstanding

   

Average

   

Remaining

   

Aggregate

 
   

Options

   

Exercise Price

   

Contractual Life

   

Intrinsic Value

 
      (in thousands)               (Years)       (in thousands)  

Balance as of December 31, 2021

    1,838     $ 66.05       6.0     $ 130,791  

Granted

    133     $ 129.01                  

Exercised

    (66 )   $ 38.79                  

Canceled

    (44 )   $ 111.66                  

Balance as of March 31, 2022

    1,861     $ 70.46       6.0     $ 133,922  

Vested and expected to vest - March 31, 2022

    1,676     $ 65.63       5.7     $ 128,682